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UNIVERSITY  OF  CALIFORNIA 


GIFT    OF 


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GIST  CONGRESS  ) 
2d  Session      / 


SENATE 


DOCUMENT 
No.  572 


NATIONAL  MONETARY  COMMISSION 


History  of  the  National-Bank 
Currency 


BY 


ALEXANDER    DANA   NOYES 


Washington  :  Government  Printing  Office  :  1910 


0 


6 1ST  CONGRESS  \  CT?TVTAT>T?  /  DOCUMENT 

2d  Session      }  SENATE  j     No.  572 


NATIONAL  MONETARY  COMMISSION 


History  of  the  National-Bank 
Currency 


BY 

ALEXANDER    DANA   NOYES 


OFTHE 

fEF 

OF 


Washington  :  Government  Printing  Office  :  1910 


NATIONAL  MONETARY  COMMISSION. 


NELSON  W.  ALDRICH,  Rhode  Island,  Chairman. 

EDWARD  B.  VRBBLAND,  New  York,  Vice-Chairman. 

JULIUS  C.  BURROWS,  Michigan.  JOHN  W.  WEEKS,  Massachusetts. 

EUGENE  HALE,  Maine.  ROBERT  W.  BONYNGE,  Colorado. 

PHILANDER  C.  KNOX,  Pennsylvania.  SYLVESTER  C.  SMITH,  California. 

THEODORE  E.  BURTON,  Ohio.  LEMUEL  P.  PADGETT,  Tennessee. 

JOHN  W.  DANIEL,  Virginia.  GEORGE  F.  BURGESS,  Texas. 

HENRY  M.  TELLER,  Colorado.  ARSONS  P.  Pujo,  Louisiana. 

HERNANDO  D.  MONEY,  Mississippi.  ARTHUR  B.  SHELTON,  Secretary. 

JOSEPH  W.  BAILEY,  Texas. 

A.  PIATT  ANDREW,  Special  Assistant  to  Commission. 


ortHE 
UNIVERSITY 


HISTORY  OF  THE  NATIONAL-BANK 
CURRENCY. 

By  ALEXANDER  DANA  NOYES. 

In  discussing  the  fluctuations  of  the  bank  circulation  in 
a  modern  state,  the  first  consideration  is  apt  to  be  the 
influence  exerted  on  the  volume  of  such  issues  by  the 
requirements  of  trade.  A  steady  increase  in  population 
will,  all  other  things  being  equal,  call  for  more  currency; 
so  will  a  steady  annual  expansion  of  industrial  activity, 
even  without  a  proportionate  increase  in  population. 
There  will  remain,  after  allowing  for  these  fundamental 
influences,  the  variation  of  demand  for  such  currency  in 
the  different  seasons.  The  harvest  months  require  more 
currency  than  the  early  springtime,  primarily  because 
the  hand-to-hand  use  of  currency  for  paying  the  wages  of 
the  agricultural  laborers  is  at  its  maximum  in  the  one 
period  and  at  its  minimum  in  the  other. 

It  is  quite  beyond  dispute  that  the  ideal  system  of  bank- 
note issues  would  be  that  which  provides  automatically 
for  such  varying  demands.  A  currency  which  is  inade- 
quate for  harvest  uses  will  result  in  the  sudden  pulling 
down  of  the  reserve  money  of  city  banks  and  the  conse- 
quent forced  reduction  of  their  loan  accounts.  A  cur- 
rency which  is  larger  than  is  needed  in  the  period  between 
harvests,  and  the  supply  of  which  can  not  be  reduced 
through  automatic  retirement  by  its  issuers,  will  usually 
bring  about  a  needless  accumulation  of  reserve  money 


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National    Monetary     Commission 

in  the  cities,  with  one  or  both  of  two  results — stimulation 
of  unhealthy  speculation  in  the  oversupplied  city  markets, 
or  expulsion  of  gold  with  possibly  awkward  incidental 
consequences. 

These  problems  have  been  present  throughout  the  his- 
tory of  our  own  national-bank  note  circulation,  since  its 
establishment  in  1864;  but  they  have  been  fundamentally 
influenced,  from  the  start,  by  another  factor  in  the  system, 
operating  quite  independently  of  the  fluctuations  of  trade, 
interior  exchange,  or  population.  Being  based  by  law  on 
the  pledge  of  United  States  Government  bonds  by  the 
issuing  bank  with  the  Treasury,  the  national-bank  note 
circulation  is  bound  to  be  influenced  by  the  amount  of  such 
government  bonds  actually  outstanding,  their  increase  or 
their  decrease.  In  any  case,  the  possible  volume  of 
national-bank  notes  outstanding  must  be  limited  by  the 
amount  of  government  bonds  in  existence  at  a  given  time. 
A  heavy  decrease  in  the  outstanding  public  debt  would 
naturally,  at  some  point,  cause  reduction  in  the  bank-note 
circulation,  independently  of  other  influences.  A  large 
increase  in  the  government  debt  would  not  necessarily 
cause  increase  in  the  supply  of  bank  notes;  but  since  the 
present  system  was  adopted  in  1864  for  the  express  pur- 
pose of  providing  a  market  for  government  bonds,  it  would 
be  reasonable  to  suppose  that  bank  notes  would  in  some 
degree  expand  in  connection  with  expansion  of  the  public 
debt.  It  is  the  purpose  of  this  paper  to  study  the  actual 
workings  of  the  bank-note  system,  since  its  establishment 
in  1864,  the  fluctuations  of  the  bank  currency  itself,  and 
the  relations  of  such  fluctuations  both  to  the  ordinary 


History  of  National- Bank  Currency 

requirements  of  trade  and  to  the  movement  of  the  public 
debt. 

It  should  be  noticed,  to  begin  with,  that  the  founders 
of  the  present  national-bank  note  system  frankly  recog- 
nized and  avowed  other  purposes  than  the  simple  purpose 
of  establishing  a  sound  and  elastic  currency.  They  had 
in  view  two  special  considerations,  each  of  which  was  of 
greater  immediate  importance  in  1864  than  elasticity  in 
the  currency,  but  neither  of  which  is  of  vital  importance 
at  the  present  day.  The  two  foremost  problems  of  the 
Administration  in  1864  were,  first,  to  finance  the  civil 
war;  second,  to  provide  for  the  future  cementing  of  the 
union  of  the  States.  This  explains  why,  advocating  in 
his  report  of  1862  a  system  of  bank-note  currency  secured 
by  government  bonds,  the  Secretary  of  the  Treasury  set 
forth,  as  the  chief  advantages  of  such  a  system,  that  the 
negotiation  of  bond  issues  by  the  Government  would  be 
greatly  facilitated;  that  "it  is  not  easy  to  appreciate  the 
full  advantages  of  such  conditions  to  a  government 
obliged  to  borrow;"  that  it  would  " reconcile,  as  far  as 
practicable,  the  interests  of  existing  institutions  with 
those  of  the  whole  people; "  and  that  it  would  provide  "a 
firm  anchorage  to  the  union  of  the  States. " 

In  other  words,  to  use  a  familiar  expression,  the  national- 
bank  act  of  1864  was  a  "  war  expedient.  "  But  when  the 
results  of  this  particular  device  are  considered  with  reference 
to  conditions  prevalent  since  the  war,  and  especially  to 
the  totally  altered  position  of  the  United  States  since 
1864  as  a  commercial  or  industrial  community,  the  expe- 
dient wears  some  very  different  aspects.  We  shall  most 


National    Monetary     Commission 

readily  discover  how  the  system  has  worked  under  these 
varying  influences,  and  under  these  changing  conditions 
of  the  country's  trade,  by  reviewing  the  history  of  the 
national-bank  note  currency  itself,  from  the  time  of  its 
establishment  up  to  the  present  day. 

During  1864,  the  first  year  of  its  operation,  $58,813,980 
national-bank  notes  were  issued.  At  the  end  of  1865,  the 
total  had  risen  to  $298,588,419.  These  additions  to  the 
currency  were  offset  by  reduction  in  the  legal -tender 
notes,  which  had  not  yet  fallen  under  the  rigid  regulation 
in  regard  to  the  limit  of  retirement,  which  was  applied  to 
them  by  act  of  Congress  in  January,  1868.  It  was  still 
the  theory  of  our  statesmen  and  financiers  that  the  bank- 
note currency  would  gradually  replace  the  government 
legal  tenders.  In  December,  1865,  the  House  of  Repre- 
sentatives had  by  resolution  indorsed  the  "  necessity  of  a 
contraction  of  the  currency,"  meaning  the  government 
notes,  and  early  in  1866  Congress  had  voted  for  a  plan 
whereby  the  legal  tenders  would  be  reduced  by  $4,000,000 
per  month.  Thus  it  happened  that  in  the  fiscal  year  end- 
ing June  30,  1866,  while  bank  circulation  increased 
$135,342,000,  United  States  notes  decreased  $30,286,000, 
and  this,  along  with  retirement  of  $122,923,000  of  the  old 
state  bank  notes,  actually  reduced  the  total  volume  of  the 
currency.  The  same  result  was  achieved  in  the  following 
fiscal  year,  when  the  total  currency  supply  was  reduced 
by  $26,000,000,  notwithstanding  $17,000,000  increase  in 
outstanding  bank  notes. 

When  contraction  of  the  legal  tenders  was  stopped  by 
act  of  Congress  at  the  beginning  of  1868,  $299,747,569  in 


History  of  National- Bank  Currency 

national-bank  circulation  was  outstanding,  and  it  re- 
mained practically  stationary  during  the  next  three  years. 
With  1871,  however,  extension  of  the  system,  chiefly 
through  organization  of  new  national  banks,  began  to  have 
marked  effect  on  the  circulation.  In  his  report  at  the  end 
of  1870,  for  instance,  the  Comptroller  of  the  Currency 
reported  that  37  new  national  banks,  with  an  aggregate 
capital  of  $3,239,000,  had  been  organized  within  the  year. 
At  the  end  of  1871  he  reported  for  that  twelvemonth  the 
organization  of  155  new  national  banks,  with  an  aggregate 
capital  of  $15,996,000.  There  was,  however,  a  special 
reason  for  this  movement.  To  what  extent  it  was  an 
automatic  response  to  the  growth  of  the  interior  com- 
munities during  the  "boom  times"  which  then  prevailed 
in  trade  may  be  judged  from  the  fact  that  out  of  the  155 
newly  founded  institutions  of  1871,  all  but  two  were  in 
localities  west  of  the  State  of  Ohio  or  south  of  Mason  and 
Dixon's  line.  Between  the  end  of  1871  and  the  end  of 
1874,  the  number  of  national  banks  was  further  increased 
by  237.  These  large  additions  to  national-bank  facilities 
in  the  interior  of  the  country  were  as  obvious  a  response 
to  the  rapid  development  of  the  country  as  was  the  rail- 
way building  of  the  period.  From  the  2,979  miles  of  new 
track  laid  in  1869 — itself  the  largest  since  the  panic  of 
1857 — the  annual  construction  rose  to  4,615  miles  in  1870 
and  to  7,379  in  1871.  This  was  the  preparation  for  the 
foundation  of  new  interior  communities.  Purchases  of 
public  lands  for  settlement  doubled  and  trebled  in  the 
same  period.  It  was  inevitable,  in  the  development  of 
ordinary  business,  that  banks  should  grow  up  along  with 

87010 — 10 2  7 


National    Monetary     Commission 

the  towns  and  railways,  and  since  the  purpose  of  these 
new  institutions  was  also,  in  great  measure,  to  provide 
currency  as  well  as  credit  for  the  growing  interior  com- 
munities which  they  served,  it  was  not  strange  that, 
despite  the  restriction  of  the  day  as  to  the  circulation  to 
be  permitted  to  any  one  national  bank,  the  total  supply  of 
bank  notes  should  have  risen  from  $306,307,672  at  the 
end  of  1871  to  $347,267,061  in  the  middle  of  1873,  and  to 
$354,128,250  even  at  the  end  of  1874. 

It  would  appear,  therefore,  that  from  the  foundation 
of  the  national-banking  system  up  to  the  panic  of  1873 
and  the  end  of  the  following  year,  movement  of  national- 
bank  circulation  proceeded  on  lines  prescribed  by  the 
natural  development  of  the  country's  population,  wealth, 
and  trade.  One  reason  why  the  machinery  operated 
with  so  little  fricton  was  that  the  amount  of  government 
bonds  outstanding  was  so  large  and  changed  so  slowly 
that  there  never  arose  any  question  as  to  the  ready  pro- 
curing of  the  requisite  collateral  for  new  national-bank 
circulation.  This  factor  in  the  problem  was  now  about 
to  be  tested  in  a  striking  way,  and  the  real  defects  of  the 
entire  system  to  be  disclosed.  In  1871,  when  the  refund- 
ing of  the  national  debt  began,  it  has  been  pointed  out  by 
Comptroller  Knox  that  the  national  banks  held  more 
than  one-fifth  of  the  government's  interest-bearing  bonds. 
A  certain  displacement  of  holdings  occurred  in  the  enor- 
mous conversions  of  the  period;  the  price  of  outstanding 
government  bonds  rose  in  such  years  as  1876  to  quite 
unprecedented  heights,  and  this  provoked  realizing  on 
such  holdings.  For  this  and  other  causes,  United  States 


History  of  National- Bank   Currency 

bonds  held  as  security  for  circulation  fell  from  $391  ,i  71 ,200 
at  the  end  of  the  fiscal  year  1874  to  $338,713,600  at  the 
end  of  1877.  The  after-panic  trade  depression  doubtless 
encouraged  this  surrender  of  holdings  and  consequent 
reduction  of  circulation,  but  the  cause  lay  deeper,  and 
a  very  short  time  afterward  began  to  display  its  inevit- 
able workings  in  a  manner  which  has  largely  made  the 
subsequent  history  of  the  American  bank-note  currency. 

No  one  has  ever  contended  that  a  currency  built  up  on 
the  basis  of  government  bond  security  will  respond  with 
automatic  elasticity  to  the  changing  requirements  of 
trade.  At  best,  government  bonds  must  be  purchased 
to  provide  for  additional* circulation,  when  such  circula- 
tion appears  to  be  needed  by  the  customers  of  a  bank. 
In  theory  at  any  rate,  retirement  of  that  circulation 
when  trade  no  longer  needs  it — whether  because  a  year 
of  depression  has  followed  a  year  of  activity,  or  because  a 
normally  inactive  season  follows  one  that  is  normally 
active — should  be  accompanied  by  sale  of  the  bonds  used 
as  security  for  it.  But  the  price  of  government  bonds 
may  be  so  high  as  to  discourage  a  bank  from  risking  pur- 
chase, or  so  low  as  to  discourage  sales.  The  result  has 
invariably  been  that  circulation,  once  taken  out  by  a 
national  bank  on  government  bond  security,  remains 
outstanding  in  entire  disregard  of  the  trade  requirements 
of  the  moment. 

This  obviously  does  away  with  elasticity.  But  what 
I  wish  more  particularly  to  discuss  is  the  fact  that,  under 
the  present  system,  bank-note  circulation  not  only  does 
not  expand  and  contract  as  trade  activity  increases  or 


National    Monetary     Commission 

diminishes,  but  is  extremely  apt  to  move  in  exactly  the 
opposite  direction  from  such  trade  requirements.  The 
history  of  our  bank-note  issues  has  repeatedly  exem- 
plified this  process;  let  us  see  just  how  and  why  it 
happens. 

A  period  of  great  prosperity  and  trade  activity  normally 
calls  for  increase  in  the  currency,  which  bank  notes 
theoretically  should  provide.  But  such  a  period  also 
brings  a  larger  public  revenue,  and,  in  a  country  of 
such  enormous  trade  as  ours,  a  rapidly  mounting  surplus 
of  public  revenue  over  expenditure.  Now  the  most 
obvious  use  of  an  overflowing  public  surplus,  during  the 
period  when  taxation  has  not  been  reduced  or  expenditure 
increased,  is  in  redemption  of  the  public  debt,  and  this 
was  the  use  that  was  made  of  the  surplus  revenue,  notably 
after  1879.  At  the  close  of  that  fiscal  year,  the  Govern- 
ment's outstanding  interest-bearing  debt  was  $1,797,- 
643,700;  at  the  end  of  the  fiscal  year  1887  it  was  $1,021,- 
692,350;  at  the  end  of  1892  it  was  $585,029,330.  This 
reduction  was  continuous,  and  part  of  it  occurred  in  a 
period  of  immense  industrial  expansion,  which  was  in 
fact  the  cause  of  the  overflowing  revenues. 

What,  then,  happened  to  the  bank-note  circulation? 
At  first,  through  the  large  conversion  operations  in  the 
public  debt,  the  national  banks  wrere  enabled  moderately 
to  increase  their  circulating  notes.  This  process,  however, 
raised  the  price  of  the  government  bonds  requisite  to 
secure  the  notes;  the  4  per  cents,  which  had  sold  at  99  in 
1879,  got  up  to  121^  in  1882.  This  of  itself  discouraged 
purchasers  to  ta&e  out  new  circulation,  and  tempted  the 


10 


History  of  National-Bank  Currency 

banks  to  retire  their  outstanding  notes  and  secure  the 
profit  on  the  released  bonds.  But  that  was  not  all.  In 
1883  there  were  on  deposit,  as  security  for  national  bank 
circulation,  some  $353,000,000  government  bonds,  and  of 
these  upwards  of  $200,000,000  were  3  per  cent  bonds 
subject  to  call  by  the  Treasury.  The  surplus  revenue 
continued  large;  it  was  used  to  pay  off  these  bonds.  As 
a  result,  the  outstanding  national  bank  notes  fell  from 
$361,882,000  at  the  opening  of  1883  to  $296,572,000  at  the 
close  of  1886. 

The  surplus  revenue  continuing,  aijd  itself  upsetting  the 
money  markets  through  the  flow  of  actual  cash  to  Wash- 
ington, where  it  was  locked  up  in  the  vaults  of  the  Treas- 
ury, Congress  in  1888  authorized  the  use  of  that  surplus, 
not  only  for  redemption  of  government  bonds  already 
matured,  but  for  purchase  of  unmatured  bonds  at  a 
premium.  During  the  next  four  years  no  less  than 
$235,000,000  was  expended  by  the  Government  in  buying 
back  its  bonds  at  the  market  price,  which  at  one  time  in 
1888,  under  these  bids  by  the  Treasury,  rose  to  130  on 
the  market.  Such  a  price  prevented  the  buying  of  gov- 
ernment bonds  for  new  bank-note  circulation  and  greatly 
stimulated  the  sale  of  bonds  held  to  support  outstanding 
notes,  and  by  July,  1891,  the  country's  total  bank-note 
circula^on  was  down  to  $167,577,214. 

That  is  to  say,  between  1883  and  1891  the  country's 
bank-note  currency  had  actually  been  reduced  53  per  cent. 
The  reduction  had  been  progressive;  sometimes,  as  in 
1886  and  1888,  it  was  most  rapid  in  the  autumn  months, 
when  the  harvest  requirements  for  currency  are  heavy. 


ii 


National    Monetary     Commission 

It  proceeded,  in  fact,  in  all  respects  without  regard  to  the 
question  of  trade  activity — a  fact  sufficiently  demon- 
strated by  comparison  of  the  checks  drawn  on  American 
banks  in  the  years  referred  to.  Such  "clearing  house 
exchanges"  were  $36,079,000,000  in  1883  and  $56,636,- 
000,000  in  1891.  The  use  of  money  for  purposes  of  trade 
had  increased  54  per  cent  in  the  very  period  when  the 
bank-note  currency,  which  should  have  served  that  trade, 
had  decreased  53  per  cent.  This  was  at  least  anomalous; 
but  we  have  seen  the  reason  for  it.  Through  the  unfor- 
tunate machinery  provided  for  such  issues  the  Govern- 
ment itself  was  killing  the  bank  circulation  and  was  doing 
so  because  it  could  not  help  itself. 

Nor  was  this  the  whole  of  the  story.  In  1893  came  the 
panic;  in  1894  began  a  period  of  prolonged  trade  reaction 
and  depression.  Now,  at  all  events,  reduction  in  bank 
circulation  would  fit  in  normally  with  the  industrial  situ- 
ation. But  the  machinery  which  had  worked  so  badly 
in  times  of  great  activity  now  proceeded  to  make  trouble 
in  exactly  the  opposite  way  during  dull  times  in  trade. 
Toward  the  close  of  1892  the  surplus  revenue  disappeared ; 
the  Government's  bond  purchases  ceased,  and  the  price  of 
United  States  bonds  fell  rapidly.  It  went  much  lower  in 
1893,  and,  as  might  have  been  expected,  national  banks 
now  began  to  buy  bonds  again  as  a  basis  for  new  circulation. 
In  1894,  the  gold  reserve  against  legal  tenders  having  been 
greatly  impaired  by  the  revenue  deficit,  the  Government 
sold  $100,000,000  new  bonds.  In  the  prevalent  financial 
distrust  national  banks  were  the  only  buyers  and,  as 
investment  of  their  deposits  in  government  bonds  was  not 


12 


History  of  National-Bank  Currency 

considered  by  them  to  be  a  part  of  the  banking  business, 
they  used  them  largely  to  obtain  new  note  circulation. 

More  bonds  were  sold  in  1895  and  1896.  As  a  result  of 
these  various  causes,  outstanding  bank-note  circulation 
rose  from  $174,404,000  at  the  end  of  1892,  to  $206,605,000 
at  the  end  of  1894,  and  to  $235,663,000  at  the  end  of  1896. 
This  was  in  the  face  of  a  trade  movement  in  this  country 
at  the  three  periods,  reflected  by  $62,011,000,000  clear- 
ing house  exchanges  in  1892,  $45,545,000,000  in  1894, 
and  $57,403,000,000  in  1896.  In  two  years  after  1892 
trade  activity  had  decreased  26  per  cent  and  yet  the  bank- 
note circulation  had  increased  18  per  cent.  The  system, 
in  other  words,  after  actually  depriving  a  genuinely 
active  and  rapidly^expanding  trade,  which  could  nor- 
mally absorb  more  currency,  of  a  good  part  of  the  very 
notes  which  had  previously  been  in  existence,  operated 
afterwards,  in  a  similarly  automatic  way,  to  crowd  the 
channels  of  circulation  with  new  bank  notes  at  a  time  when 
trade  was  in  a  state  of  extreme  depression,  when  it  did 
not  need  and  could  not  use  the  note  circulation  which  it 
had  possessed  already. 

This  is  sufficient  illustration  of  the  tendencies  of  the 
present  system  of  bond-secured  bank-note  circulation 
under  conditions  which  have  actually  prevailed  before 
and  which  may  prevail  again.  It  is  not  difficult  to  pic- 
ture a  chain  of  circumstances  in  which  the  country's 
bank  circulation  might  be  absolutely  annihilated,  at  a 
time  when  a  full  currency  supply  was  needed  for  business 
purposes,  or  in  which,  on  the  other  hand,  it  might  be 
indefinitely  inflated  at  a  time  when  the  existing  supply 

13 


National    Monetary     Commission 

was  already  superfluous.  The  first  result  would  certainly 
occur,  regardless  of  trade  conditions,  in  the  conceivable 
condition  of  extinction  of  the  national  debt.  This  is  a 
contingency  not  at  present  in  sight,  but  it  is  one  which 
actually  arose  in  1836,  and  which  seemed  in  1888  in  a  fair 
way  to  recur — on  both  occasions  as  a  direct  result  of  active 
general  trade,  which  expanded  the  public  surplus  at  the 
moment  when  trade  needs  for  the  bank  currency  were 
themselves  expanding. 

The  second  contingency  is  a  constant  possibility.  The 
Panama  Canal  will  call  for  repeated  issues  of  United  States 
government  loans;  as  the  law  now  stands,  these  new  bonds 
must  be  sold  at  par  or  higher,  and  must  not  bear  a  higher 
interest  rate  than  2  per  cent.  But  these  stipulations  vir- 
tually restrict  the  market  for  such  bonds  to  the  national 
banks.  Supposing  for  the  sake  of  argument  an  indefinite 
continuance  of  bond  issues  for  such  purposes  and  under 
such  conditions,  the  bank-note  currency  would  inevitably 
expand  along  with  the  bond  issues,  and  without  any  ref- 
erence whatever  to  the  needs  of  trade. 

It  is  true  that  of  recent  years,  the  difficulty  of  1888, 
when  bank  circulation  was  arbitrarily  reduced  through 
use  of  the  public  surplus  for  wholesale  redemption  of  out- 
standing government  bonds,  has  been  mitigated  through 
great  increase  of  public  deposits  in  the  national  banks. 
Until  ten  years  ago,  it  was  assumed  that  such  deposits 
ought  not  to  be  increased  beyond  the  amount  necessitated 
by  the  routine  operations  of  Government.  On  exceptional 
occasions  they  became  very  large;  they  reached 
$279,000,000  during  Secretary  Sherman's  refunding  op- 


History  of  National-Bank  Currency 

erations  of  1879,  anc^  $95,000,000  pending  the  financing 
of  the  Spanish  war  loans  of  1898.  But  in  each  of  these 
cases  the  deposits  were  cut  down  to  relatively  small 
figures  when  the  particular  operation  requiring  their 
temporary  increase  had  been  completed;  total  deposits 
falling  at  one  time  in  1880  as  low  as  $9,750,000.  Their 
increase  to  $61,500,000  in  1888  caused  very  widespread 
criticism.  Beginning  with  1900,  however,  a  different 
policy  was  pursued;  in  November,  1903,  government 
bank  deposits  rose  to  $168,047,000;  in  the  panic  of  1907, 
they  rose  to  $256,920,000,  nearly  paralleling  Secretary 
Sherman's  maximum,  though  for  a  very  different  reason. 
The  use  of  government  bonds  as  collateral  for  this 
greatly  increased  trust  fund  restrained  the  tendency 
toward  unnecessary  expansion  in  bank-note  circulation; 
but  it  none  the  less  continued  the  artificial  situation.  So 
long  as  government  bonds  alone  were  accepted  as  collateral 
against  public  deposits,  and  in  large  measure  after  other 
collateral  had  been  declared  lawful,  the  available  supply 
of  such  bonds  for  bank -circulation  purposes  was  restricted 
almost  as  severely  as  when  the  Government  bought  up 
its  own  bonds  in  1888.  On  the  other  hand,  whenever 
the  government  bank  deposit  fund  was  reduced — as  it 
would  be,  necessarily,  in  case  of  deficit  in  public  revenue, 
and  as  it  was  to  the  extent  of  $100,000,000  between  De- 
cember, 1903,  and  July,  1905 — the  necessary  result  was 
to  set  free  a  proportionate  amount  of  the  bond  collateral 
for  which  virtually  no  market  would  exist  at  the  prevalent 
artificial  prices,  except  among  banks  which  could  be  in- 
duced to  add  to  their  circulation.  The  resultant  increase 


National    Monetary     Commission 

in  bank-note  issues  might  occur  at  a  time  when  additional 
currency  was  required  for  an  expanding  trade;  but  there 
was  not  the  least  assurance  that  this  would  be  the  case. 
Like  all  other  influences  exerted  on  the  bank  circulation 
by  the  supply  of  government  bonds,  the  indirect  influ- 
ence of  the  bond-secured  government  deposits  has  been 
purely  arbitrary,  and  was  quite  as  likely  to  operate  against 
the  legitimate  interests  of  trade  as  in  favor  of  them. 

We  have  seen  how  awkwardly  the  movement  of  national  - 
bank  circulation  operated  in  the  period  prior  to  1896. 
Shortly  after  that  year  there  began  the  great  industrial 
revival  which  continued  throughout  nearly  all  of  the 
ensuing  decade.  It  was  plain  from  the  start  that,  with 
the  unprecedented  expansion  of  trade  and  industry,  the 
need  for  circulating  medium  at  the  seasons  of  particular 
business  activity  would  be  proportionately  great.  The 
country  approached  this  chapter  of  its  development  with 
the  bank-note  currency  in  perhaps  the  most  rigid  con- 
dition in  its  history.  From  $51,300,000,000  in  1896,  ex- 
change of  checks  at  the  country's  clearing  houses  rose  to 
$68,900,000,000  in  1898 — a  new  high  record  in  our  his- 
tory— and  to  $94,100,000,000  in  1899.  They  were  des- 
tined to  reach  the  enormous  figure  of  $160,000,000,000  in 
1906.  That  is  to  say,  the  country's  business  activity,  as 
measured  by  this  exchange  of  checks,  was  about  to  treble 
itself  within  a  decade. 

Yet,  so  far  as  could  be  seen  in  1896,  proper  facilities  for 
automatic  response  by  bank  circulation  to  the  resultant 
requirements  were  altogether  lacking.  Accident  helped 
out  the  situation  to  some  extent;  the  Spanish  war  of  1898 


16 


History  of  National-Bank  Currency 

added  $200,000,000  to  the  government  debt,  and  thus  to 
the  supply  of  bonds  available  as  a  basis  for  new  circulation. 
Legislation  also  did  its  part.  In  connection  with  the 
gold  standard  act  of  March  14,  1900,  provisions  were  made 
whereby  United  States  bonds  could  be  bought  for  that 
purpose  without  the  risks  involved  in  such  high  premiums 
as  had  prevailed  on  the  4  per  cents  in  1882  and  1888. 
The  greater  part  of  the  public  debt  outstandin  at  higher 
rates  of  interest  was  converted  into  a  thirty-year  2  per 
cent  loan,  the  purpose  being,  first,  through  the  low  nter- 
est  yield,  to  throw  the  bulk  of  such  bonds  into  the  bank- 
ing field,  where  special  inducements  for  holding  them 
existed;  second,  to  narrow  the  range  of  possible  fluctua- 
tions in  the  price;  and,  third,  through  the  relatively  lower 
price  which  the  2  per  cents  would  command,  to  reduce  the 
capital  which  had  to  be  locked  up  in  a  purchase  of  bonds 
as  collateral  for  bank  notes.  In  addition,  the  law  now 
permitted  issue  of  circulation  up  to  the  par  value  of  the 
bond  collateral,  instead  of  90  per  cent,  as  previously,  and 
the  tax  on  notes  thus  secured  was  reduced  from  i  per  cent 
to  one-half  of  i  per  cent. 

In  response  to  these  various  influences,  outstanding 
bank-note  circulation,  which  had  actually  decreased  during 
the  rapid  trade  recovery  in  the  last  half  of  1897  and  the 
first  half  of  1898,  and  which  was  stationary  throughout 
1899,  increased  from  $246,277,223  at  the  end  of  the  last- 
named  year  to  $340,141,871  at  the  end  of  1900,  and  to 
$360,289, 726  at  the  end  of  1901.  It  was  in  January,  1901, 
that  the  national-bank  notes,  for  the  first  time  in  our 
history,  ran  beyond  the  $346,681,016  United  States  notes 


Li,, 


National    Monetary     Commission 

During  the  subsequent  years  of  intense  financial  and 
industrial  activity,  the  organization  of  new  national  banks 
and  increase  of  circulation  by  older  institutions  caused 
an  absorption  of  the  government  bonds  into  the  hands 
of  the  banks  such  as  had  never  before  existed.  It  became 
increasingly  difficult  to  obtain  these  bonds  for  purposes 
of  new  circulation — not  less  so  when  the  increase  in  public 
deposits  secured  by  government  bonds  threw  an  increased 
burden  on  the  existing  supply  of  bonds.  The  outstand- 
ing principal  of  the  interest-bearing  United  States  debt 
at  the  end  of  the  fiscal  year  1907  was  $894,834,280,  as 
against  $987,141,040  at  the  end  of  1901,  and  within  the 
same  period  the  amount  of  national-bank  notes  outstand- 
ing had  increased  from  $353,742,187  to  $603,788,690. 
This  increase,  moreover,  went  on  with  practically  no 
relation  whatever  to  the  incidental  ebb  and  flow  of  trade. 
In  the  first  three  or  four  months  of  1902,  and  again  in  the 
same  months  of  1903,  outstanding  circulation  was  re- 
duced by  three  or  four  millions,  but  in  the  subsequent 
four  years  there  was  not  one  month  which  showed  a 
reduction  from  the  month  preceding. 

The  immediate  sequel  to  the  panic  of  1907  was  even 
more  impressive.  That  national  bank  circulation  should 
have  increased,  during  the  money-hoarding  and  currency- 
famine  episodes  of  November  and  December,  1907,  was 
entirely  normal;  it  expanded  $46,237,729  in  the  one 
month  and  $33,912,699  in  the  other.  But  the  equally 
normal  event,  when  the  hoarded  currency  rushed  sud- 
denly back  to  the  channels  of  circulation  during  January, 
1908,  would  have  been  not  only  retirement  of  all  the  addi- 

18 


History  of  National-Bank  Currency 

tional  bank  notes  put  out  during  that  money-hoarding 
period,  but  further  and  very  .drastic  reduction  in  the 
bank  circulation  as  it  existed  before  the  panic;  for,  in 
the  trade  stagnation  of  the  first  half  of  '1908,  actual 
volume  of  trade  in  our  principal  industries  fell  for  a  time 
to  one-half  or  one-third  of  what  it  had  been  the  year 
before.  During  March,  1908,  the  country's  clearing 
house  exchanges  decreased  33  per  cent  from  1907.  Dur- 
ing the  three  months  ending  with  March,  the  shrinkage 
was  28  per  cent.  This  happened  while  other  currency 
than  bank  notes  was  heaping  up  at  such  a  rate  in  city 
depositories  that  the  specie  and  legal  tender  reserve  of 
the  New  York  Associated  Banks  alone,  at  the  opening 
of  April,  1908,  was  $65,000,000  greater  than  a  year  before. 
The  May  reports  of  the  national  banks  of  the  whole 
United  States  showed  an  increase  in  reserves,  as  com- 
pared with  the  same  month  in  1907,  of  $170,000,000. 
Here  was  assuredly  every  economic  reason  for  retirement, 
on  an  extensive  scale,  of  outstanding  bank  note  circulation. 
The  currency  was  manifestly  oversupplied. 

Yet  so  clumsy  and  inelastic  did  the  apparatus  again 
turn  out  to  be,  that  at  the  end  of  May,  1908,  the  out- 
standing bank  notes  actually  showed  an  increase  of 
$8,318,612  from  the  unprecedented  total  reached  at  the 
end  of  December,  1907,  and  exceeded  by  no  less  than 
$96,508,967  the  figure  reported  at  the  end  of  May,  1967, 
when  trade  activity  had  been  fairly  at  its  maximum. 
Even  with  the  slow  and  irregular  contraction  of  bank 
circulation  during  the  subsequent  months  of  idle  trade, 
the  total  stood,  in  May  of  the  present  year,  $87,000,000 


National    Monetary     Commission 

above  the  highest  level  ever  reached  in  that  month  during 
any  year  prior  to  1908. 

The  sum  of  the  whole  matter  is  that  under  the  exist- 
ing system  of 'bank  notes  based  upon  government  bonds, 
normal  and  automatic  expansion  and  contraction  of  the 
currency,  in  response  to  needs  of  trade,  is  flatly  impossi- 
ble. The  currency  supply  may  be  greatly  enlarged  in 
the  dull  midsummer  months  and  suddenly  contracted 
when  the  active  autumn  business  season  begins.  It 
may  increase  rapidly  at  a  time  when  trade  reaction  has 
reduced  to  a  minimum  the  necessities  for  even  the  exist- 
ing bank  note  supply,  or  it  may  be  as  rapidly  reduced 
when  large  harvests,  full  employment  of  labor,  and  active 
hand-to-hand  use  of  currency,  most  need  a  larger  circu- 
lating medium.  That  there  is  no  remedy  for  this  abnor- 
mal situation,  except  the  substitution  of  some  other  sys- 
tem for  that  which  prescribes  the  United  States  Govern- 
ment bond  as  a  basis  for  bank  note  issues,  every  economist 
at  all  familiar  with  the  question  agrees.  It  is  only  when 
discussion  converges  on  the  system  which  is  to  be  sub- 
stituted, that  difference  of  opinion  is  encountered. 


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